Put unlisted cash to work to lift SA
Poor public service deters better use of private equity fortune
● A lack of policy certainty and professionalism in the public service is deterring socially critical investment in the unlisted space by the private equity industry, says former Public Investment Corporation (PIC) boss Elias Masilela.
“It is not happening to the extent one would expect.”
Masilela, a commissioner in the Public Service Commission and executive chair of DNA Economics, spoke at the launch of Southern Africa Venture Capital’s 2018 private equity survey recently.
He stressed that private equity investment is key to solving the country’s social problems and tackling inequality.
The survey shows a steep curve over the past five years in private equity investment, which reached a record R31.1-billion for the region last year. But this is a fraction of the money available, he says.
“As a proportion of GDP, private equity investment is not having the kind of impact we need it to have.”
Improving professionalism in the public service is critical.
Part of this is teaching public sector employees that their role is “not looking after the interests of the politicians but looking after the interests of society”, he says.
“This puts the economic case above all else.
“If you’re going to invest in the economy you must be comfortable that the services you will need to grow your business, such as telecommunications, electricity, water and transport, will be delivered professionally.”
The bulk of these services come from state-owned enterprises (SOEs).
“So when we talk about professionalism, it is not only in local, provincial and national government but in SOEs, which are critical in making the economy tick.
“Most of them are monopolies, so if they falter it has a much wider ripple effect than when a player in the competitive environment falters.”
Another restraining factor is the belief that socially responsible investment does not generate the same returns as investment in listed companies.
The evidence shows that returns are significantly higher over the long term, meaning more than 10 years.
But to do this, private equity investors need long-term policy certainty, which they’re not getting.
“Policy uncertainty keeps cropping up and people are not sure what the policy environment is going to be like … and how investor-friendly it is going to be.
“If there is this level of uncertainty, people focus on short-term positions, which works against our long-term objectives in this country.”
He says too many pension funds are sitting on cash mountains which could change SA’s economic trajectory if invested in the unlisted space.
“It’s easier for them to play in the listed space because the risks are better understood and quantified.”
Pension fund trustees lack the knowledge to invest effectively in the unlisted space, he says.
By law, half of them are appointed by the employer and half by the unions.
“It is only the 50% appointed by the employer that fully understand the pension fund industry and are equipped to deal with risk.”
Most of the rest are shop stewards who are constantly being rotated and don’t get a chance to learn and understand retirement funding.
As a result, hundreds of billions of rands are invested in JSE-listed companies rather than where it would make a more useful contribution.
“It would have a huge impact on reducing inequality if these pension funds invested more in the unlisted space,” he says.
“Given the size of pension funds in SA, they are systemic players and have the potential to shift the direction of the economy, depending on how they think and how they invest the money at their disposal.”
Research has shown there is always a relationship between the macro economy and the performance of pension fund assets.
“The direction is usually from the economy to the performances of funds, but given their size they can reverse this by investing in the right infrastructure, in things that crowd in the private sector.
“And once the private sector has been crowded in all of a sudden private capital takes the responsibility to grow the economy instead of relying on the government and pension funds only.”
Unions need to improve the quality, integrity and accountability of the people they appoint as trustees, and change their mandate so they can’t use it as an excuse for not investing in the unlisted space, he says.
“The owners of capital need to accept that they must increase risk appetite around the boardroom table.”
Like the Government Employees Pension Fund (GEPF) did, he says. “They decided they were going to influence the way in which the economy performs, and they wrote that into the mandate.”
It might be argued that this has given the PIC, which manages the GEPF, the latitude to make some very questionable investments for political reasons.
Not least under his own leadership.
“Not every investment is going to deliver what we want it to deliver,” he says, refusing to comment specifically on PIC investments.
Social security funds like the massive Unemployment Insurance Fund (UIF) also need to make better use of their money to drive growth and reduce inequality, he says.
“The UIF is sitting on a mountain of cash [easily upwards of R120bn].
“If they invested that money in the right way they would not have to be paying so much unemployment insurance, but would be getting people quicker back into the productive economy.
“It could significantly alter the economic trajectory of SA.
“Retirement funds need to invest right; they need to invest in projects that are job creating, that educate and upskill and provide health to our people.”
Changing the mandate to allow more investment in unlisted entities would not “necessarily” invite more political interference in investment decisions, he says.
“If they have integrity and are professional and accountable, that risk is managed.”
How well has it been managed by the PIC? “I do not want to comment on that.”
Masilela resigned from the PIC in 2014, three years into his five-year contract, amid rumours of politically related push factors. He won’t comment on that either.
“Maybe in the next life,” he says.
If you’re going to invest … you must be comfortable that the services you need will be delivered
Elias Masilela
Former Public Investment Corporation boss